Profit plunge turns China’s $3.5t stock rout into trap

China’s stock market is facing growing pessimism. As investors continue to sell shares, there are few signs that the downward pressure on the market is easing.

The country’s economy is so weak that corporate profits are declining. However, the situation has not yet reached a point where the government is likely to introduce a major new stimulus package to revive economic activity.

According to compiled data, the market capitalisation of China’s stock market, the world’s second-largest, has fallen by $3.5 trillion from its peak in May. The decline intensified further last week.

As a result, China’s onshore benchmark CSI 300 Index has entered a bear market. A technology-sector index in Hong Kong is at risk of losing all the gains it made following Beijing’s announcement of a major economic stimulus package two years ago.

One of the main reasons for investors’ pessimism about China’s stock market is the prolonged weakness in consumer spending and fierce price competition among businesses. As a result, revenues across various sectors—including banks, electric vehicle manufacturers, and artificial intelligence (AI) developers—are coming under pressure.

The situation has become even more challenging as expectations fade that Chinese leaders will take swift and substantial action to stimulate the weak economy, which is still slowing at a tolerable pace.

Ulrich Urban, head of multi-asset investment strategy and research at German investment firm Berenberg, said, “It is still too early to conclude that the worst is over.”

According to him, the biggest concern is corporate profitability. Although China remains strong in manufacturing and exports, that strength is not consistently translating into stronger domestic demand, greater pricing power, or higher corporate profits.

The third-quarter reporting season got off a disappointing start, with battery giant Contemporary Amperex Technology Co Ltd, or CATL, suffering a profit miss that was symptomatic of both weak demand and fierce competition.

The consensus 2026 earnings forecasts for the MSCI China Index members has declined by over 4% since the end of March, according to compiled data. The Hang Seng Tech Index, dominated by Chinese internet firms mired in e-commerce price wars, has seen profit projections plunge more than 13% during the period.

Yet even against the lowered expectations, the MSCI China’s constituents that have released results have missed consensus forecasts by an average of 9%, set for the second worst quarterly miss in two years, according to calculations.

Among them, AI infrastructure builder China Mobile’s January-September net profit tumbled 8% on year amid cost pressures, while major materials firm Ganfeng Lithium Group also missed estimates on falling prices.

“CATL is the best poster child of what’s going on: great innovative company that’s doing great things but a victim of cut-throat competition and margin squeeze,” said Jason Lemire, chief investment officer at Bold Wealth Partners. “Competition is encouraged and generally brutal in China, not shareholder friendly.”

The earnings pressure has left companies, particularly China’s internet behemoths that are in a tense race to fund costly AI infrastructure build-outs, increasingly out of cash. That has forced some of them to tap the equities market to raise funds, such as Alibaba Group Holding’s $10 billion follow-on stock sale, which further diluted share value.

“I’d always weigh Japan, Korea and Taiwanese firms over China because they have better earnings,” said Stanley Tang, senior portfolio manager at Sumitomo Mitsui DS Asset Management. “If you ask me what China can do, hard to think of any — even further localization of tech may not help to boost share prices.”

Weakening investor confidence is also showing up via other measures. Turnover in China’s onshore stock market is hovering near the lowest level since July last year, while the outstanding amount of margin trades — bets funded by borrowed cash — fell to the least in a year.

To be sure, the slumping market has already prompted authorities to mobilize state funds known as the national team to prevent stock prices from spiraling out of control.

Meanwhile, the recent rout has boosted the appeal of Chinese equities to some investors. Bridgewater Associates’ China arm, for one, said it has turned “prudently optimistic” on local stocks, saying the declines in the third quarter were largely driven by liquidity while valuations aren’t high. It also argued that policy favors long-term capital formation and more money may flow into equities given low bond yields.

Still, skepticism abounds that while the national team’s rescue efforts may be a temporary fix, the market’s long-term prospect remains dim given policymakers’ reluctance to adopt big-bang stimulus measures to accelerate economic growth.

China’s third-quarter gross domestic product grew 4.5% from a year ago, nudging expansion in the first nine months back into the government’s annual goal of 4.5%-5%. That target-meeting performance has given authorities more reason to stick to a drip-feed style of growth support, without compromising fiscal discipline or further reducing historically low borrowing costs.

“Policymakers are comfortable with the nature of economic growth,” said William Bratton, head of cash equity research for Asia Pacific at BNP Paribas. “As a result, either because they’re consciously keeping it in reserve or because philosophically they don’t believe in it, there’s no urgency to use fiscal measures to promote large scale consumption.”

Source: Bloomberg